Land use planning policies can, in principle, raise welfare by correcting market failures. Recent evidence, however, casts doubt on this proposition and suggests that such regulations have strong adverse net effects. Turner et al. (2012) estimate the net cost of land use regulations as a proportion of land value to reach a hefty 38% in their sample of residential plot transactions across the US. In an earlier study, Cheshire and Shepphard (2002) estimate the net costs of land use planning policies in the UK to amount to as much as 3.9% of annual household incomes. We are talking about big numbers.
These big numbers hide substantial heterogeneity. Glaeser et al. (2005) estimate that land use regulations are akin to a ‘shadow’ tax that represents over 50% of the values of houses in Manhattan and San Francisco, 20% in DC and Boston, 12% in NYC or Salt Lake City, and 0% in Detroit, Baltimore, and Houston (see Table 1, column 3). Likewise, Cheshire and Hilber (2008) estimate the regulatory tax for 14 British and 8 continental European office locations. The average shadow tax over the sample period amounts to a staggering 800% of marginal construction costs in the West End of London, 437% in Frankfurt, 97% in Newcastle, and 68% in Brussels.